Reduce This Year’s Tax By Prepaying Your Income Protection Premiums

Income protection pays a monthly benefit if the insured person has been unable to work because of sickness or injury for a specified length of time. The regular monthly benefit received allows them to meet their financial commitments during the period in which they are unable to work or work at full capacity.

Typically, Income Protection can replace up to 80% of your monthly income. 

If you are considering income protection insurance, you can pre pay your premiums for up to 12 months which can allow you to receive the benefit of a tax deduction this year – potentially reducing your taxable income – whilst receiving the benefit of income protection for the following financial year.    It is important to remember that any benefits paid will be assessable at your marginal tax rate.

Types of Income Protection

There are basically three types of income protection premiums, guaranteed, reviewable and renewable.  Below we explain the difference between policy types.

  • Guaranteed premium. This tends to be the most expensive premium because your premium cost is fixed regardless of the length of the policy term. The policy holder has the security of knowing that their premium will be fixed every month for the life of the policy. 
  • Reviewable premium. Reviewable income protection premiums are reviewed every few years and begin with a low premium but increase overtime as reviewed.
  • Renewable premium. This is a type of reviewable premium where a policy is reviewed every time it is renewed – typically between one and five years.

Your experienced Insurance Adviser will be able to help you determine the type of Income Protection Policy best suited to your needs.

Although Income Protection can work out to be more expensive than Life Insurance, you should keep in mind that the monthly premiums are tax deductible as they allow you to earn an income in the event of accident and illness.  Likewise, the benefits paid after a successful claim is made under your income protection insurance policy are taxable in the same way as your normal income is.

Variables to Consider

  • The Benefit Payment Period.  Income Protection is designed to ensure you still receive an income in the event of accident or illness.  The benefits can be paid for a various lengths of time, such as one year or five years or extended through to retirement age. Even though it will cost you more to have the benefits paid to your retirement years you should remember that is really what this type of insurance is really all about, long term protection against serious long term illness or injury that prevents you from earning an income.
  •  The Waiting Period.  There are many factors to keep in mind here, eg. Are you self employed? If you are an employee the chances are that you’ll have sick pay and other leave entitlements to fall back on for a certain period.  If you are self employed you may not have such provisions in place and will need to rely on your savings to meet your commitments. You should therefore give thought to the length of time you’re willing to wait before the monthly benefits start getting paid. The longer you extend the waiting period the lower your premium costs will be.

Leanne’s Story

Leanne is a 33 year old non smoker earning a salary of $100,000 per year.  Leanne has taken out an Income Protection Policy outside her superannuation fund to replace up to 80% of her salary ($6667 per month) if she is unable to work for more than one month due to illness or injury.  By claiming the annual premium of $1367 as a tax deduction in the 2012/2013 financial year she should be eligible for a tax saving of $526. Leanne’s potential tax saving by prepaying her Income Protection Premiums for 2013/2014 before 30 June 2013 are shown below.

Before

After

Salary

$100,000

$100,000

Less insurance deduction

n/a

-$1,367

Taxable income

$100,000

$98,633

Tax payable

$26,447

$25,921

Tax saving in 2012/2013*

$526

*Including Medicare levy

For further information on how Income Protection can help you maintain your current lifestyle and at the same time reduce your income tax burden, contact the team at Make A Difference Insurance.